Self-Employed vs. Independent Contractor – What is the Difference?

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It seems there is a trend to move more and more work to Independent Contractors rather than hire employees directly onto payroll. The answer above is missing a few very critical points, particularly what is the legal definition of a contractor; and can my job be filled by a 1099 worker or must I use a W-2 employee?

The answer here is as simple as two little words. A Duck. If it walks like a duck and quacks like a duck, it’s a duck. In other words, if the position requires the employee to be directed as to how, when, where and with what to do the job, then get quacking… he is a W-2 employee. If however, the job will be done independently, then a 1099 may be the way to go.

Think of a roofer. If you call someone to fix your roof you don’t tell them what size nails to use, how to swing the hammer, which guys will work and when lunch break is. That is because they are independent (AKA 1099)contractors. Now if you have an administrative assistant who is required to be at the office at 9:00 AM, dress according to code, take lunch at noon, use Microsoft Word on an office computer and report to a supervisor, that’s a W-2 employee.

A “1099 worker” is also referred to as an “independent contractor”.“Contractor” is a legal term for a person or firm that enters a contract to perform a service or provide a product in exchange for valuable consideration.Valuable consideration includes monetary pay, goods, services, and more. 1099 is the tax form that these workers use for the IRS.

The IRS has a guide that helps define 1099 workers by establishing criteria for employees, non-employees and independent contractors. Some of the points the IRS considers include:

  • Behavioral control – the extent to which the hiring company controls and directs the worker.
  • Instructions the business provides to the worker – the worker’s freedom in choosing when and where to work, what tools to use, where to purchase supplies, where to purchase related services, what work must be performed by a specified individual,whether subcontractors are permitted, and more.
  • Training provided to the worker — independent contractors usually use their own methods to carryout work.
  • Financial control– independent contractors usually have unreimbursed expenses, make a significant investment in the facilities they use to carry out work, invoice by flat fee/rate or some other method than a regular wage, and end up in a situation where they face a profit or loss.
  • Relationship type— independent contractors have written contracts, no benefits, non-permanent relationships, non-core functions, and the freedom to work for other companies.

Employee mis-classification is something that the Feds aren’t messing with. From large businesses to mom-and-pop shops, the fines are everywhere and they’re not cheap. If you use a 1099 employee the IRS assumes certain criteria are met. If the person working does not meet these criteria, you may be liable for back taxes, fines or even jail time.  Estimates are that 20% of businesses mis-classify workers; so make sure your business isn’t included in this nasty statistic. Read “Independent Contractor (Self-Employed) or Employee?” on the IRS website. Don’t forget that to be safe on the 1099 issue.

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